AUD Extends Gains on RBA Rate Hike Bets, Offsetting US Data Impact

The Australian dollar extended its rebound against the US dollar on Wednesday, closing higher for a third consecutive session. Despite the latest US inflation data prompting investors to reprice bets that the Federal Reserve could raise rates by end-2026, the Reserve Bank of Australia's hawkish policy outlook dominated currency direction, lifting the Aussie from around 0.7159 earlier to the 0.71819 level.

**RBA Rate Hike Expectations as Core Driver**

The RBA had already surprised with a 25-basis-point rate hike to 3.85% in February 2026, becoming the first major central bank to tighten policy that year. According to market sources, the board unanimously agreed at the time that domestic inflationary pressures had materially picked up, with private-sector demand growing faster than expected. Subsequent meeting minutes also showed that the risk of further tightening remains if inflation stays elevated. This stance, diverging from the global easing trend, has significantly narrowed the Australia-US rate differential, attracting carry-trade inflows and providing solid policy support for the Aussie. Morgan Stanley analysts have previously favored the Aussie's risk-beta characteristics, projecting a year-end target toward 0.7250.

**US Data Impact Relatively Limited**

Overnight US economic data was mixed. On one hand, the June ISM services PMI eased slightly to 54.0 but remained in expansion territory, with the employment sub-index recovering from 47.9 to 51.2, painting a picture of economic resilience. On the other hand, last week's soft non-farm payrolls data had already dampened hawkish bets on the Fed. Although Fed Governor Waller maintained a hawkish stance, reiterating the 2% inflation target, investors' expectations for Fed rate hikes have cooled from earlier, and the dollar failed to sustain upward momentum, providing a relatively benign external environment for Aussie bulls.

**Outlook: Focus on Policy Path Clues**

The market is closely watching the upcoming release of the Fed's latest meeting minutes for more clues on the rate path under new Chair Kevin Warsh. Meanwhile, Australia's robust labor market and sticky inflation remain key supports for the Aussie. Goldman Sachs had forecast the Australian dollar to rise to 0.7100 by mid-year, and the current exchange rate has already significantly exceeded that level, indicating the market is more fully pricing in the RBA's hawkish stance.